Question

Jack Hammer invests in a stock that will pay dividends of $3.04 at the end of the first year, $3.38 at the end of the second year, and $3.72 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for $54 What is the present value of all future benefits if a discount rate of 11 percent is applied? Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Dividend Present Value 304 334 3.72

Answer 1

Dividend	Present value
$3.04	$2.73873873873
$3.38	$2.74328382436
$3.72	$2.72003193843
$54.00	$39.4843345902
Total	47.69

Present Value of Dividend in Year 1

= D1/(1 + r)¹

= $3.04/(1 + 0.11)¹

= $3.04 / 1.11

= $2.73873873873

Present Value of Dividend in Year 2

= D2/(1 + r)²

= $3.38/(1 + 0.11)²

= $3.38 / 1.2321

= $2.74328382436

Present Value of Dividend in Year 3

= D3/(1 + r)³

= $3.72 / (1 + 0.11)³

= $3.72 / 1.367631

= $2.72003193843

Present Value of Stock Price in Year 3

= P3(1 + r)³

= $54.00/(1 + 0.11)³

= $54.00 / 1.367631

= $39.4843345902